Identifying Your Next Industry Niche? Go Where the Profits Are

In my January blog “5 Reasons Every Business Banker Should Have Industry Niches,” I noted that successful bankers should study up and figure out the industries on which to focus. One factor you should consider is industry profitability. Generally speaking, profitable companies accumulate lots of assets and can therefore afford to pay back bigger loans. They can also afford to purchase treasury management products that make their businesses more efficient. So, starting with profit consideration is a good place to begin.

Operating margins vary widely across industries. According to BizMiner, a firm that researches and analyzes financial and market data for thousands of industries, the industries with the greatest pre-tax return on revenue percentages are the following:

Industry

Net Margin

Ambulatory Surgery Centers

36.04%

Self-Storage Services

26.04%

Pawn Shops

25.08%

Financial Planners & Investment Advisors

23.08%

Motion Picture, TV & Video Production

20.43%

Family Planning Centers

19.84%

Commercial Brokers & Property Managers

19.81%

Consumer Lending

18.58%

Warehousing & Storage Services

18.54%

Securities Brokers

18.38%

No surprise that ambulatory surgery centers are at the top of the list. Their main competition is hospitals, which are bureaucratic, inefficient, and overcharge for services. The nation’s 4,100 ambulatory surgery centers on average generate about $5.5 million per location.

Another helpful ranking of industry profitability comes from Sageworks, a financial software company that tracks the performance of small businesses. Sageworks’ list focuses on industries with firms generating less than $10 million in revenue in 2016.

Industry

Net Margin

Accounting, Tax Preparation, Bookkeeping & Payroll Services

18.4%

Management of Companies & Enterprises

15.5%

Offices of Real Estate Agents & Brokers

15.19%

Automotive Equipment Rental & Leasing

14.55%

Legal Services

14.48%

Offices of Dentists

14.41%

Electric Power Generation, Transmission & Distribution

14.02%

Lessors of Real Estate

14.01%

Offices of Other Health Practitioners

13.30%

Offices of Physicians

13.01%

An article about this list on Entrepreneur.com points out that many of these industries provide services that require little investment and have few expenses, and therefore owners earn higher margins. Small service industries can make great niche markets for you to pursue because they may build their own buildings, invest their wealth, buy second homes, and therefore needs lots of banking services. For example, a three-partner law firm may have $1.2 million in revenue, $600,000 in expenses, and earn $600,000 per year—a 50 percent “profit margin”—which is money left over to be used at the partners’ discretion. On the other hand, a grocery store, with $500 million in revenue, would more likely maintain a 1.5 percent operating margin—about $7.5 million. So very small businesses often have larger operating margins—especially if you take partner salaries and incomes into account.

But don’t cry for larger firms; they often also enjoy big profits. Here are the 10 most profitable industries according to an article in Forbes. Its data was provided by Factset, a firm that gathers data for investment managers and hedge funds.

Industry

Net Margin

Pharma, Generic

30%

Investment Managers

29.1%

Tobacco

27.2%

Pharma, Major

25.5%

Internet Software/Services

25%

Biotechnology

24.6%

Savings Banks

24%

IT Services

23%

Regional Banks

23%

Major Banks

22.9%

My point in showing you this list of larger industries is that smaller firms can effectively compete against larger firms due to big companies’ high profit margins. Could Internet Software/Services, IT Services, or Investment Managers become a good niche for you?

Of course, check with your credit team before spending too much time pursuing an industry to make sure your bank has an appetite for its risk. In the meantime, I hope these lists help you think more strategically—and become an industry expert in a winning industry!